For the past three decades, biofuels policy has been an important issue for a number of countries [1] in terms of economic, ecological and social benefits and costs. Due to the multidimensional character of biofuels policies, various objectives have been defined by national governments, such as:

Apart from these positive implications expected and also already proved as result of biofuels policies, negative effects also have been specified by scientific studies, affecting such as rural areas, soil and ground water quality, welfare, growth and poverty, and food security [2, 3]. Moreover, recent studies show that the effects of biofuels vary strongly between different biofuels production paths [4], and the evaluation based mostly on Life-Cycle Analysis – the most frequently applied method – is often controversial (A/N). Also, Plieninger and Bens [4] claim that “life-cycle assessments for biofuels are complex and highly controversial; the system limits in terms of included environmental parameters and steps of the production process are rarely standardized, and assessments can hardly keep pace with the rapid developments in the field”.

Referring to the current scientific discussion on advantages and disadvantages of methods applied heretofore in the field of biofuels policies, we first analyze possible benefits, challenges and uncertainties resulting for the environment from the biofuels production and consumption. Based on this, we discuss the suitability of various new and classical approaches for valuation of environmental questions, reflected by the presented benefits and challenges of biofuels production and decision making policies.

The paper is structured as follows. Chapter two presents the materials and methods used for the analysis. In chapter three, the state of the present discussions, different empirical analyses and notions about environmental benefits, challenges and opportunities of biofuels production are presented, creating the basis for the subsequent evaluation analysis. In chapter four, based on the economic theory, the suitability of the respective presented economic approaches for valuation of environmental aspects in biofuels policy are discussed. Finally, conclusions and research outlook are formulated in chapter five.

In this paper, we analyze benefits expected from the biofuels consumption as well as challenges resulting from the biofuels production, and provide an overview of methods commonly used in environmental economics and environmental assessment, which can be helpful and suitable for evaluation of biofuels policies. We focus our analysis on non-market valuation approaches, as environmental assets mostly cannot be expressed in monetary values and are therefore not traded. For the investigations and discussion, we use such methodological approaches as: literature survey of empirical research studies, including characteristics and synthesis, followed by an analytical deductive approach and descriptive analysis.

When discussing benefits and challenges resulting for the environment from biofuels, we differentiate between biofuels consumption and biofuels feedstock production and claim that negative effects for the environment can result from biofuels production, while positive effects result from biofuels consumption.

Environmental (positive and negative) effects and implications of biofuels involve several issues, for example, CO₂ emissions, water consumption, soil degradation, biodiversity, and land use changes, as well as forest habitats, both in the short-, middle- and long term.

Many analyses prove positive effects of biofuels consumption in the reduction of greenhouse gas (GHG) emissions and the subsequent improvement of the air quality, as well as positive energy balance in ecosystems. In addition, some new technologies used in biofuels feedstock production allow maximizing environmental benefits. Following benefits of biofuels consumption have already been specified in scientific studies:

• Ethanol consumption can reduce the greenhouse gas emission and thus help to improve air quality. According to RFA [5], the production and consumption of 9 billion gallons of ethanol in the U.S. in 2008 reduced CO₂ equivalent greenhouse gas emissions by approximately 14 million tons (the equivalent of removing more than 2.1 million cars from America's roadways).

• The second generation biofuels (lignocellulosic ethanol) are a promising alternative that is said to considerably reduce the greenhouse gas emissions. According to the European Commission [6], lignocellulosic ethanol can reduce GHG emissions by around 90% on average, when compared with fossil petroleum, and also other ethanol and biodiesel feedstock [7]. With regard to the first generation biofuels, sugar cane was assessed the best feedstock for ethanol production, since it can contribute to the CO₂ reduction by 90%, compared to the gasoline [8] (figure 1).

• Ethanol indicates positive net energy balance [9]. According to the U.S. Department of Agriculture [10], ethanol yields 67% more fossil energy than it is used to grow and harvest the grain and process it into ethanol (different specifications can occur for different producer countries, see: [1].

Concurrently, other authors prove that increased biofuels production could impair water quality, cause soil erosion, reduce water availability, and adversely affect wildlife habitats by changing land use patterns. However, the extent of these effects is uncertain and could be mitigated by such factors as improved crop yields, feedstock selection, use of conservation techniques, and improvements in biorefinery processing [11]. Several issues regarding environmental protection by biofuels production and consumption are discussed in scientific and political debates, thus creating challenges (or uncertainties) for policy making in the future [12]. The following challenges of biofuels production have been defined by scientists and political stakeholders:

• Ethanol has been proved to reduce air pollution, emissions of cancer-causing compounds such as benzene, toluene, xylene, and ethyl benzene (emitted by burning gasoline), and thus greenhouse gas emissions [13]. Accordingly, challenges for the currently implemented technologies can be identified. According to Borders and Sterling Burnett [14], because of a 35% lower energy potential per gallon (compared to the gasoline); the amount of ethanol used per mile/km is higher than of gasoline.

• With regard to the energy use, Christianson [15] showed that from 2004 till 2007 the required energy to produce ethanol and co-products decreased by 13.5%. Also according to EEA [13], the total energy use for ethanol production was reduced by 21.8% from 2001 till 2006. These results confirm growing efficiency of biofuels production, which translates to the decreasing costs of the first generation biofuels. According to Plieninger and Bens [16], the challenge for conservation is not biofuels use per se, but the way in which biomass is produced. Innovative land-use systems specifically designed for energy crops that have both high energy productivity per area, and support high structural and species diversity, might offer a way out of this energy dilemma.

• Another challenge refers to expanding biofuels production in agriculture and forestry and the resulting interactions with other land use patterns and/or with nature conservation [17]. Some authors claim that set aside lands could be used for energy crop cultivation, which would compromise the conservation value [18], since the EU regulations require about 10% of European crop lands be ‘set aside’ from any kind of agricultural production. On the other hand, certain concerns also exist about potential over-conversion of semi-natural grasslands to energy croplands, even if few economic incentives have been specified [19] for energy crops to encroach on marginal lands of high conservation value in central Europe. Also, Borders and Sterling Burnett [14] claim that ethanol production in the US can induce negative environmental effects if higher corn yields are achieved by higher nitrogen and pesticides use, or else by converting fallow fields, forests, wetlands and wild lands or land set-asides for environmental protection under the Conservation Reserve Program, to agriculture for biofuels production. Therefore, ‘first generation’ biofuels are said to challenge off-reserve conservation in agricultural landscapes considerably more than nature reserves.

• With regard to water use, several challenges can be named for biofuels feedstock production. As many biofuels crops require intensive water irrigation, inefficiencies and ecological disadvantages can occur in middle and long term, such as soil compaction, soil erosion, nutrient leaching, simplified crop rotations and the loss of habitats and species [19]. Also, sedimentation and/or excess nutrient (nitrogen and phosphorous) runoff into surface waters, and infiltration into groundwater from increased fertilizer application occur [1].

Most challenging for biofuels production is its efficiency, since the current (and future) costs of ethanol production are estimated to be higher than the costs of the traditional gasoline, regardless of the kind of the production feedstock [20] (Figure 2). Thus, the future development of biofuels policies clearly depends not merely on the positive or negative economic, environmental and social effects, but rather on biofuels profitability and prices for fossil resources and the maintenance of public incentives (Figure 2) [16].

Analyzing the benefits and challenges of biofuels production, multiple questions appear with regard to positive and negative effects of biofuels on the environment. Also, different studies deliver different responses to the addressed problems, which indicates that the absolute effects and implications of biofuels production and consumption are still disputable, while sophisticated methodologies to solve these complex questions still need to be developed. In order to address these methodological issues of biofuels evaluation, in the following chapter we present an overview of different approaches commonly used in environmental economics evaluation. These methods can be considered to support decisions in biofuels policies and can help to solve the discussed environmental problems.

When discussing policy evaluation, the maximization of welfare is acknowledged to be one of the most important factors. This includes both the social welfare (SW) and political welfare (PW) [21]. While social welfare reflects changes of individual well-being (formula 2):

(with: i – i^th individual, t – time, W – well-being),

the political welfare (PW) reflects more practical picture of market situation, including not only individuals but also other “interested parties” or “pressure groups” (formula 3):

(with: n – number of interested parties, α, (1-α)- strength of political regard for social well-being and the well-being of interest groups).

The following methods presented are based on the approach of welfare maximization and aim at evaluating both individual and governmental decision making processes and policies, thus considering both social and political welfare.

In analyzing environmental aspects of biofuels policies, a number of valuation and monitoring approaches can be recommended, for the purpose of improving sustainable use of natural resources, as well as measuring positive and negative environmental effects.

We present acknowledged methods of environmental assessment, which can be also used for addressing questions regarding GHG emissions, biodiversity, and land use changes of biofuels feedstock production and biofuels consumption. Generally, the methods of environmental evaluation can be split into three groups:

1. Market valuation for estimation of market values of the production feedstock and changes of natural resources.

2. Maintenance valuation, which estimates the costs necessary to sustain at least the present level of natural resources.

3. Non-market valuation (behavioral valuation), including: contingent valuation and behavioral methods (e.g., hedonic property values) for estimating the value of consumptive services of natural resources (compare: [22]).

In the market valuation of natural resources, the estimation of different stocks can be complex due to different character of natural resources. For example, stocks of fixed assets, like land, can be valued on the basis of market prices observed in surveys of market transactions. If this information is not available, market process of similar assets can be taken into account. For the assets which can be marketed, the following methods can be used: discounted (present) value of natural resources, net price method, user-cost allowance approach, or travel cost method, whereby some challenging aspects need to be addressed simultaneously, e.g. estimation of proper discount rates.

With regard to the valuation of environmental aspects of biofuels, the market valuation can be implemented for estimation of land use costs for biofuels feedstock production, based on land rent or lease prices. However, this estimate delivers only a partial assessment of costs resulting from the biofuels feedstock production, since other non-fixed assets of the environment, like flora and fauna habitats, air, water, and soil, which cannot be traded in the market, are not considered. For the purpose to also include these aspects in the environmental valuation of biofuels production, other approaches of non-market valuation are recommended.

Since most nature assets are not tradable or tangible, the methods of non-market valuation are most frequently used for assessing environmental impacts of different policies. Therefore we focus our analysis on this form of valuation.

Contingent valuation method elicits the economic welfare change resulting from changes in the environmental goods and services. Using this behavioral approach, in a form of referendum, respondents decide between a trade-off for environmental improvement (or not) in exchange for an increase in tax payments (or no increase) (compare: [23]). The basis for this method creates the estimate of “willingness to pay” (WTP) or “willingness to accept” (WTA). Willingness to pay for environmental services is defined as a maximum value or amount that a person is willing to pay to obtain this good or service or to avoid the loss of this good (the financial expenses donated for the environmental good or service insure a constant utility) [24] (formula 3):

where:

V denotes the indirect utility function of an individual,

y is income,

p is a vector of prices,

q₀; q₁ are the alternative levels or quality indexes (with q₁ > q₀ indicating that q₁ refers to improved environmental quality),

Z is a vector of individual characteristics.

Accordingly, “willingness to accept” is defined as the amount of money that an individual is going to accept for deterioration of environmental quality to keep his utility constant (ibid.) (formula 4):

However, Getzner [25] recommends considering in environmental economics a new concept, “willingness to trade” (willingness to exchange, also called “model of pure exchange”), suggested by Gowdy and Olson [26] that reflects and explains trade-offs of decision making in a more transparent way.

Another form of contingent valuation is attribute-based stated choice method_ that divides the decision situation into attributes, and elicits responses on different bundles of attributes that contain different levels of environmental quality to be exposed to a change, as well as different level of monetary inputs.

With regard to the environmental evaluation of biofuels policy, the contingent valuation approaches can be used for assessing social and stakeholder opinions about existing trade-offs between environmental and economic benefits. Due to a broader scope of attributes being considered, the attribute-based method seems to be a more comprehensive method for environmental valuation in biofuels production. Moreover, assuming negative effects of possible excessive extension of biofuels production (fertilizers accumulation in the soil, loss of habitats and species), by using contingent valuation, the willingness to accept these negative changes by inhabitants in the respective regions and by stakeholders realizing environmental policy standards, can be assessed. This case confirms the suitability of applying the different concepts of “willingness to pay”, “willingness to accept”, and especially “willingness to trade”.

Cost-benefit analysis (CBA) is most commonly used method for project and policy evaluation. While benefits are defined relatively to contribute to improve human well-being, the costs reflect monetary expenses necessary for the policy/project implementation. In a final valuation stage, the net present value (NPV) of benefits (formula 5) is a decisive factor for determining a project or a policy.

with: B_t and C_t – benefits and costs in year t, r – discount rate, T – time horizon [27]. In cases without monetary valuable outcome, cost-effectiveness analyses are suitable.

Referring to environmental valuation of biofuels policies, the cost-benefit analysis or the cost-effectiveness analysis can be applied for assessing, in a more global system, the positive and negative effects of both biofuels production and consumption. For example, they can be used for assessment of costs of intensive water irrigation, soil erosion, nutrient leaching, loss of habitats and species or costs of biofuels production related to environmental benefits of biofuels consumption (thus assessing economic efficiency or effectiveness of biofuels). As cost-benefit analysis is a methodological basis for a number of other valuation approaches, the method is frequently used in an extended and more sophisticated form, like Life Cycle Analysis (discussed below), covering many aspects of different sectors in one system of economic, ecological and social variables.

In multi-criteria evaluation, multiple criteria (e.g., impact, effectiveness, efficiency, relevance) are defined in a descriptive or prescriptive way and assessed by stakeholders. The assessments are weighted and ranked, thus providing a solution with a best (optimal) outcome. However, conflicting goal and linear, as well as non-linear, relations between the criteria can deliver a new level of complexity. Using the Multi-criteria Decision Aid methods (MCDA), the aim is rather to construct or create a reliable aid for decision makers, to shape, argue, or transform their preferences or to make the decision in conformity with their goals, rather than to find one optimal solution (compare: [28]).

In the field of biofuels policy, little research has been done on multi-criteria evaluation, which is determined by insufficient statistical and empirical data, and complex relations between different fields, sectors, and objectives of biofuels policies. In this context, the effects of different policy design schemes and/or the linking of the currently implemented agro-environmental measures with environmental standards of biofuels policies, could be analyzed, thus insuring the production of biofuels according to sustainability criteria.

In addition, Environmental Impact Assessment (EIA), Strategic Environmental Assessment (SEA), Life Cycle Analysis (LCA), Risk Assessment (RA), Risk-Benefit Assessment (RBA) are known in environmental economics for their use in the evaluation of more complex approaches. As EIA, SEA and LCA do not address directly non-environmental impacts, benefits and costs, they are recommended to be used complementary with other valuation methods such as CBA. However, apart from this shortcoming, the methods are suitable methodological instruments to address synergies between individual policies, projects, and options to evaluate alternatives and also to opt for a solution with a higher environmental value (compare: [21]). The RA approach estimates a trade-off between the health and environment regarding the implementation of a policy or production of a product. Risk assessment is normally expressed with environmental indicators, while decisions are made on the basis of comparisons between the estimated risk level and the defined “acceptable” (or no-risk) level that is defined according to stakeholder assessments. Similarly, in the Comparative Risk Assessment (CRA), the option/project/policy with the lowest risk level can be estimated. Risk-Benefit Analysis can be viewed as an alternative to CBA, since risks are treated as costs and expressed in monetary values (compare: [21]).

When referring to environmental assessment of biofuels policy, the previously mentioned methods cover several aspects that have not been addressed by the classical approaches. The application of LCA for biofuels analyses has been rapidly progressing in recent years, providing insights into, among others, environmental impacts of programs that encourage biofuels production, farmland requirements and the impacts on food production or energy balance [29- 31]. However, due to the fact that biofuels policy and effects of biofuels feedstock production or biofuels consumption are not clearly known, the application of the named approaches is still challenging and requires interdisciplinary investigations.

Since each of the presented methods denotes both advantages and disadvantages with regard to the scope of addressing environmental aspects, depending on conducted valuation, a combination of different approaches as complementary methods is recommended. This can help to analyze environmental issues and measurable and immeasurable assets more comprehensively, thus providing a more complete picture of both positive and negative effects resulting from different policies. Therefore, the triangulation approach is recommended [32, 33] which seeks to implement multiple methods, multiple sources within one method, multiple analysts, or multiple theories [34]. Even if the approach is resource-intensive, challenging and facing the problem of missing data, it helps to identify also unanticipated effects of policies, creating thus a base for side-effect valuation.

In this paper, benefits, challenges and uncertainties of biofuels consumption, production and policy making have been discussed from different perspectives. Different approaches from environmental economics have also been presented. These investigations created a basis for an analytical discussion and survey about how far and to what extent the respective economic approaches can be suitable for evaluation of environmental questions within biofuels policies, such as CO₂ emissions, water consumption, soil degradation, biodiversity, or land use changes.

Based on the results of the literature survey, the analysis shows several benefits from biofuels consumption. Simultaneously, other studies prove negative effects of biofuels, resulting especially from the biofuels feedstock production. Thus, a differentiation between the biofuels consumption and production effects is strongly recommended. Considering positive effects of biofuels and confronting them with negative effects, several challenges and opportunities emerge for the future evaluation and biofuels policy design.

The analysis of economic valuation approaches shows their advantages as well as shortcomings in valuating environmental aspects in biofuels policies. Thus, a combination of different approaches as complementary tools is recommended in order to provide a more complete and comprehensive picture of both positive and negative effects resulting from different policies. Moreover, the application of the economic evaluation approaches for estimation of costs and benefits of the second and third generation biofuels in a broader system is recommended in the future.

Additionally, behavioral approaches for valuation of biofuels policies, considering social aspects and including stakeholder assessments in the environmental decision making process are highly recommended. Using such approaches, both social and political opinions and preferences with regard to environmental protection while implementing biofuels policies, can be directly addressed, which again can help to maximize social and political welfare.

References